With B2B purchases online rising significantly in the last decade, purchase orders and the significance of the purchase order number is a key component to these transactions.
While purchase orders seem like additional paperwork at first, any growing company knows that the details in a PO are critical to managing and completing the purchase.
These B2B purchases are far more complicated than most consumer-grade transactions, so knowing the best ways to organize and conduct them is necessary to ensure a smooth and compliant business relationship.
Let’s go over purchase orders, their place in the procure to pay cycle, and how to manage the PO number.
How Does a Purchase Order Work?
Before we get into the nitty gritty of purchase order numbers, we need to talk about the general approval workflow for POs and other related documents.
What Is a Purchase Order Form?
We understand purchase orders, so what is a purchase order form? When a buyer or client wants to procure products or services from a vendor or supplier, the buyer uses a purchase order form to communicate the exact nature of the transaction, including the product quantity, delivery date, etc. It’s created after the purchase request is approved internally, and then sent to the vendor so it can be fulfilled. At this point the PO is considered a legally binding document.
In addition to the standard details mentioned above, a typical purchase order will contain the following components:
- The date of the order
- Payment terms and conditions
- Delivery date and payment deadlines
- Applicable taxes
- Contact information for both the client and the supplier
- The billing address
- A unique PO number
A PO essentially provides clarity into the purchase for both the buyer and the seller, forming a legal document that sets everything in stone before the shipments begin. There are a few special cases of POs, such as the blanket purchase order for repeated transactions over a period, but we’ll keep things simple for the sake of this article.
Why Do Purchase Orders Matter?
We’ve mentioned that purchase orders solidify any communication between the buyer and the seller regarding a specific transaction, but there are other reasons to use POs. Companies go through the trouble of working with these documents for several reasons:
- Tracking transactions: The purchasing business can use a PO to keep track of orders, when it can expect the goods to be delivered, and confirmation of delivery through a goods received note. With a tangible document, organizing operations and budgeting properly are much easier tasks.
- Legal binding: POs are essentially legal protection for the purchase. Should there be any delivery problems or payment failures, both sides can reference the PO document to prove who’s at fault and who needs to fix the problem.
- Auditing: Should you ever be undergoing a financial audit, a purchase order acts as a conclusive paper trail to cross-check invoices and generally verify your purchasing activity.
It’s worth noting that you don’t have to create a purchase order for every transaction. Some examples include:
- Transactions where the amount is below a certain threshold: When the amount of money is small enough, most companies skip over the purchase order phase to simplify operations.
- Purchases where the total cost is initially unknown: For instance, advertising or legal expenses do not use purchase orders.
- Certain regular payments: Utility bills like electricity and gas, as well as subscription services, usually just come with regular monthly billing.
- Expense reimbursements: These payments made to employees internally for travel costs, supplies, and other materials go through a reimbursement request rather than a PO.
POs play a vital role in order fulfillment and buyer-vendor communication, but they aren’t the only documents to keep track of.
What About Other Transactional Documents?
What’s the distinction between a purchase order and an invoice? The rule of thumb is that a purchase order is written by the buyer before the transaction, whereas an invoice is composed by the seller at the end of the process to define what must be paid.
A PO number is naturally always present on a purchase order, though you won’t always find a number on an invoice. These “non-PO invoices” lack an invoice number because they were not for pre-approved transactions and do not have a corresponding purchase order.
Another type of document you might see is the sales order, which is sent out by a vendor to the buyer to confirm a transaction before the order is fulfilled.
What is a PO Number?
A PO number is a unique identifying number assigned to a purchase order – the document detailing the buyer’s intention to purchase goods or services from a specific vendor or supplier. The PO number is important for managing and tracking purchases, as well as an asset in record keeping for AP and accounting teams.
A PO numbering system is key when you work with a large number of purchase orders regularly, as most buyers and sellers do.
How Exactly Does a Purchase Order Number Help?
Procurement and finance departments use PO tracking numbers largely for organizational and legal reasons:
- Setting prices in stone so that neither party can change what was previously agreed upon
- Having exact numbers decided on regarding who owes what
- Matching a corresponding invoice to the PO when fulfillment completes to resolve discrepancies
- Inventory management and cash flow planning so that you know exactly what has been purchased and what will arrive at a certain date
- Future auditing purposes. If you ever need to reference an old purchase, having the number facilitates with digging up the old document.
A unique PO number simply makes order tracking faster and more accurate for both sides, preventing duplicate payments or filing mistakes from occurring.
How Are PO Numbers Made?
As there’s no industry standard for the practice, the system of generating purchase order numbers differs among businesses. But before you go randomly generating numbers for your POs, let’s go over a systematic way of assigning tracking numbers so that you can get the most out of this numbering system.
Generating an Individual PO Number
PO numbers are decided by the buyer. If you’re one of the small business owners with relatively few purchases to make, creating a unique PO number is straightforward.
Just use a unique number assigned to identify each transaction. For example, 00001 for the first one followed by 00002, 00003, 00004, and so on. You can also use letters and symbols if you believe they will help simplify the process. When using an automated process, generating purchase orders and PO numbers takes a lot less thought.
Write this string out on every purchase order document you produce somewhere near the top. Be sure to include other essential PO information too like the name of the other party, the amount, and any order details as mentioned previously. Do so for every transaction you undergo regardless of the time, nature of the order, or the vendor.
Keeping track of PO numbers can help contribute to a healthier procurement policy in a business. Some best practices when working with PO systems include:
- Tracking all your suppliers through a database so that you can quickly find and contact one should you have any inquiries about a past invoice.
- Developing an approval workflow to process requisitions, purchase orders, and other documents accurately and quickly.
- Setting up proper recordkeeping to generate an audit trail and make auditing easier should the need for it arise in the future.
- Ensuring quality assurance by checking for errors and duplicates early on in the purchase orders.
- Allowing for cancellations and documenting them properly so that they fit within your PO management system.
But since purchase orders are such an important part of a business’s financial health and inventory management, you might want to consider working with professional purchase order systems, which often come as part of an overall third-party cloud-based accounting software solution.
Working with a PO Number System
Accurately handling multiple and ongoing purchase orders can take a lot out of the budget and available manpower in your business, so some companies end up saving time and money by outsourcing the work to a third-party platform.
Certain enterprise resource planning (ERP) or accounting software suites, for instance, automatically generate and assign a unique number and put it down on a PO template for fast processing. They can also help route the documents to the appropriate stakeholder or team for accelerated sign-offs.
This practice is known as automatic PO number generation, and it’s been gaining steam in recent years as cloud-based service providers have greatly cheapened its adoption cost. Larger businesses that find the manual approach of number generation and assignment too impractical and inaccurate look to these platforms for solutions.
The Takeaway: Optimizing the Purchase Order Process Should Be a Top Priority
Purchase order numbers are essentially unique identifiers for every PO document you process and send to another company. These numbers greatly simplify the management of individual documents and help with financial auditing.
How you handle PO numbers is up to you. While you can create your own internal system of numerics, it’s heavily recommended to outsource the job to a third-party platform when your purchasing activity begins to increase in size and complexity.
Optimizing the PO processing and approval cycle is all about implementing the right tools and automation solutions to get the job done quickly and accurately.
